Last week, a coalition of predominantly Sunni Arab countries, primarily from the Arabian Peninsula and organized by Saudi Arabia, launched airstrikes in Yemen that have continued into this week. The airstrikes target Yemeni al-Houthis, a Shiite sect supported by Iran, and their Sunni partners, which include the majority of military forces loyal to former President Ali Abdullah Saleh. What made the strikes particularly interesting was what was lacking: U.S. aircraft. Although the United States provided intelligence and other support, it was a coalition of Arab states that launched the extended air campaign against the al-Houthis.Three things make this important. First, it shows the United States' new regional strategy in operation. Washington is moving away from the strategy it has followed since the early 2000s — of being the prime military force in regional conflicts — and is shifting the primary burden of fighting to regional powers while playing a secondary role. Second, after years of buying advanced weaponry, the Saudis and the Gulf Cooperation Council countries are capable of carrying out a fairly sophisticated campaign, at least in Yemen. The campaign began by suppressing enemy air defenses — the al-Houthis had acquired surface-to-air missiles from the Yemeni military — and moved on to attacking al-Houthi command-and-control systems. This means that while the regional powers have long been happy to shift the burden of combat to the United States, they are also able to assume the burden if the United States refuses to engage.Most important, the attacks on the al-Houthis shine the spotlight on a growing situation in the region: a war between the Sunnis and Shiites. In Iraq and Syria, a full-scale war is underway. A battle rages in Tikrit with the Sunni Islamic State and its allies on one side, and a complex combination of the Shiite-dominated Iraqi army, Shiite militias, Sunni Arab tribal groups and Sunni Kurdish forces on the other. In Syria, the battle is between the secular government of President Bashar al Assad — nevertheless dominated by Alawites, a Shiite sect — and Sunni groups. However, Sunnis, Druze and Christians have sided with the regime as well. It is not reasonable to refer to the Syrian opposition as a coalition because there is significant internal hostility. Indeed, there is tension not only between the Shiites and Sunnis, but also within the Shiite and Sunni groups. In Yemen, a local power struggle among warring factions has been branded and elevated into a sectarian conflict for the benefit of the regional players. It is much more complex than simply a Shiite-Sunni war. At the same time, it cannot be understood without the Sunni-Shiite component.

Iran's Strategy and the Saudis' Response

One reason this is so important is that it represents a move by Iran to gain a major sphere of influence in the Arab world. This is not a new strategy. Iran has sought greater influence on the Arabian Peninsula since the rule of the Shah. More recently, it has struggled to create a sphere of influence stretching from Iran to the Mediterranean Sea. The survival of the al Assad government in Syria and the success of a pro-Iranian government in Iraq would create that Iranian sphere of influence, given the strength of Hezbollah in Lebanon and the ability of al Assad's Syria to project its power.For a while, it appeared that this strategy had been blocked by the near collapse of the al Assad government in 2012 and the creation of an Iraqi government that appeared to be relatively successful and was far from being an Iranian puppet. These developments, coupled with Western sanctions, placed Iran on the defensive, and the idea of an Iranian sphere of influence appeared to have become merely a dream.However, paradoxically, the rise of the Islamic State has reinvigorated Iranian power in two ways. First, while the propaganda of the Islamic State is horrific and designed to make the group look not only terrifying, but also enormously powerful, the truth is that, although it is not weak, the Islamic State represents merely a fraction of Iraq's Sunni community, and the Sunnis are a minority in Iraq. At the same time, the propaganda has mobilized the Shiite community to resist the Islamic State, allowed Iranian advisers to effectively manage the Shiite militias in Iraq and (to some extent) the Iraqi army, and forced the United States to use its airpower in tandem with Iranian-led ground forces. Given the American strategy of blocking the Islamic State — even if doing so requires cooperation with Iran — while not putting forces on the ground, this means that as the Islamic State's underlying weakness becomes more of a factor, the default winner in Iraq will be Iran.A somewhat similar situation exists in Syria, though with a different demographic. Iran and Russia have historically supported the al Assad government. The Iranians have been the more important supporters, particularly because they committed their ally, Hezbollah, to the battle. What once appeared to be a lost cause is now far from it. The United States was extremely hostile toward al Assad, but given the current alternatives in Syria, Washington has become at least neutral toward the Syrian government. Al Assad would undoubtedly like to have U.S. neutrality translate into a direct dialogue with Washington. Regardless of the outcome, Iran has the means to maintain its influence in Syria.When you look at a map and think of the situation in Yemen, you get a sense of why the Saudis and Gulf Cooperation Council countries had to do something. Given what is happening along the northern border of the Arabian Peninsula, the Saudis have to calculate the possibility of an al-Houthi victory establishing a pro-Iranian, Shiite state to its south as well. The Saudis and the Gulf countries would be facing the possibility of a Shiite or Iranian encirclement. These are not the same thing, but they are linked in complex ways. Working in the Saudis' favor is the fact that the al-Houthis are not Shiite proxies like Hezbollah, and Saudi money combined with military operations designed to cut off Iranian supply lines to the al-Houthis could mitigate the threat overall. Either way, the Saudis had to act.During the Arab Spring, one of the nearly successful attempts to topple a government occurred in Bahrain. The uprising failed primarily because Saudi Arabia intervened and imposed its will on the country. The Saudis showed themselves to be extremely sensitive to the rise of Shiite regimes with close relations with the Iranians on the Arabian Peninsula. The result was unilateral intervention and suppression. Whatever the moral issues, it is clear that the Saudis are frightened by rising Iranian and Shiite power and are willing to use their strength. That is what they have done in Yemen.In a way, the issue is simple for the Saudis. They represent the center of gravity of the religious Sunni world. As such, they and their allies have embarked on a strategy that is strategically defensive and tactically offensive. Their goal is to block Iranian and Shiite influence, and the means they are implementing is coalition warfare that uses air power to support local forces on the ground. Unless there is a full invasion of Yemen, the Saudis are following the American strategy of the 2000s on a smaller scale.

The U.S. Stance

The American strategy is more complex. As I've written before, the United States has undertaken a strategy focused on maintaining the balance of power. This kind of approach is always messy because the goal is not to support any particular power, but to maintain a balance between multiple powers. Therefore, the United States is providing intelligence and mission planning for the Saudi coalition against the al-Houthis and their Iranian allies. In Iraq, the United States is providing support to Shiites — and by extension, their allies — by bombing Islamic State installations. In Syria, U.S. strategy is so complex that it defies clear explanation. That is the nature of refusing large-scale intervention but being committed to a balance of power. The United States can oppose Iran in one theater and support it in another. The more simplistic models of the Cold War are not relevant here.All of this is happening at the same time that nuclear negotiations appear to be coming to some sort of closure. The United States is not really concerned about Iran's nuclear weapons. As I have said many times, we have heard since the mid-2000s that Iran was a year or two away from nuclear weapons. Each year, the fateful date was pushed back. Building deliverable nuclear weapons is difficult, and the Iranians have not even carried out a nuclear test, an essential step before a deliverable weapon is created. What was a major issue a few years ago is now part of a constellation of issues where U.S.-Iranian relations interact, support and contradict. Deal or no deal, the United States will bomb the Islamic State, which will help Iran, and support the Saudis in Yemen, which will not.The real issue now is what it was a few years ago: Iran appears to be building a sphere of influence to the Mediterranean Sea, but this time, that sphere of influence potentially includes Yemen. That, in turn, creates a threat to the Arabian Peninsula from two directions. The Iranians are trying to place a vise around it. The Saudis must react, but the question is whether airstrikes are capable of stopping the al-Houthis. They are a relatively low-cost way to wage war, but they fail frequently. The first question is what the Saudis will do then. The second question is what the Americans will do. The current doctrine requires a balance between Iran and Saudi Arabia, with the United States tilting back and forth. Under this doctrine — and in this military reality — the United States cannot afford full-scale engagement on the ground in Iraq.

Turkey's Role

Relatively silent but absolutely vital to this tale is Turkey. It has the largest economy in the region and has the largest army, although just how good its army is can be debated. Turkey is watching chaos along its southern border, rising tension in the Caucasus, and conflict across the Black Sea. Of all these, Syria and Iraq and the potential rise of Iranian power is the most disturbing.Turkey has said little about Iran of late, but last week Ankara suddenly criticized Tehran and accused Iran of trying to dominate the region. Turkey frequently says things without doing anything, but the development is still noteworthy.It should be remembered that Turkish President Recep Tayyip Erdogan has hoped to see Turkey as a regional leader and the leader of the Sunni world. With the Saudis taking an active role and the Turks doing little in Syria or Iraq, the moment is passing Turkey by. Such moments come and go, so history is not changed. But Turkey is still the major Sunni power and the third leg of the regional balance involving Saudi Arabia and Iran.The evolution of Turkey would be the critical step in the emergence of a regional balance of power, in which local powers, not the United Kingdom or the United States, determine the outcome. The American role, like the British role before it, would not be directly waging war in the region but providing aid designed to stabilize the balance of power. That can be seen in Yemen or Iraq. It is extremely complex and not suited for simplistic or ideological analysis. But it is here, it is unfolding and it will represent the next generation of Middle Eastern dynamics. And if the Iranians put aside their theoretical nuclear weapons and focus on this, that will draw in the Turks and round out the balance of power.

NEW YORK – The latest economic data from the eurozone suggest that recovery may be at hand. What is driving the upturn? What obstacles does it face? And what can be done to sustain it?

The immediate causes of recovery are not difficult to discern. Last year, the eurozone was on the verge of a double-dip recession. When it recently fell into technical deflation, the European Central Bank finally pulled the trigger on aggressive easing and launched a combination of quantitative easing (including sovereign-bond purchases) and negative policy rates.

The financial impact was immediate: in anticipation of monetary easing, and after it began, the euro fell sharply, bond yields in the eurozone’s core and periphery fell to very low levels, and stock markets started to rally robustly. This, together with the sharp fall in oil prices, boosted economic growth.

Other factors are helping, too. The ECB’s easing of credit is effectively subsidizing bank lending. The fiscal drag from austerity will be smaller this year, as the European Commission becomes more lenient. And the start of a banking union also helps; following the latest stress tests and asset quality review, banks have greater liquidity and more capital to lend to the private sector.

As a result of these factors, eurozone growth has resumed, and eurozone equities have recently outperformed US equities. The weakening of the euro and the ECB’s aggressive measures may even stop the deflationary pressure later this year.

But a more robust and sustained recovery still faces many challenges. For starters, political risks could derail progress. Greece, one hopes, will remain in the eurozone. But the difficult negotiations between the Syriza-led government and the “troika” (the ECB, the European Commission, and the International Monetary Fund) could cause an unintended accident – call it a “Grexident” – if an agreement on funding the country is not reached in the next few weeks.

Moreover, Podemos, a leftist party in the Syriza mold, could come to power in Spain. Populist anti-euro parties of the right and the left are challenging Italian Prime Minister Matteo Renzi. And Marine Le Pen of the far-right National Front is polling well ahead of the 2017 French presidential election.

Slow job creation and income growth may continue to fuel the populist backlash against austerity and reform. Even the ECB estimates that the eurozone unemployment rate will still be 9.9% in 2017 – well above the 7.2% average prior to the global financial crisis seven years ago. And austerity and reform fatigue in the eurozone periphery has been matched by bailout fatigue in the core, boosting support for a range of anti-euro parties in Germany, the Netherlands, and Finland.

A second obstacle to sustained recovery is the eurozone’s bad neighborhood. Russia is becoming more assertive and aggressive in Ukraine, the Baltics, and even the Balkans (while sanctions against Russia have hurt many European economies). And the Middle East is burning just next door: the recent terrorist attacks in Paris and Copenhagen, and against foreign tourists in Tunisia, remind Europe that hundreds of homegrown jihadists could return from fighting in Syria, Iraq, or elsewhere and launch further attacks.

Third, while ECB policies keep borrowing costs lower, private and public debt in the periphery countries, as a share of GDP, is high and still rising, because the denominator of the debt ratio – nominal GDP – is barely increasing. Thus, debt sustainability will remain an issue for these economies over the medium term.

Fourth, fiscal policy remains contractionary, because Germany continues to reject a growing chorus of advice that it should undertake a short-term stimulus. Thus, higher German spending will not offset the impact of additional austerity in the periphery or the significant shortfall expected for the three-year, €300 billion ($325 billion) investment plan unveiled by European Commission President Jean-Claude Juncker.

Fifth, structural reforms are still occurring at a snail’s pace, holding back potential growth. And, while structural reforms are necessary, some measures – for example, labor-market liberalization and pension overhauls – may boost the eurozone’s savings rate and thus weaken aggregate demand further (as occurred in Germany following its structural reforms a decade ago).

Finally, Europe’s monetary union remains incomplete. Its long-term viability requires the development over time of a full banking union, fiscal union, economic union, and eventually political union. But the process of further European integration has stalled.

If the eurozone unemployment rate is still too high by the end of 2016, annual inflation remains well below the ECB’s 2% target, and fiscal policies and structural reforms exert a short-term drag on economic growth, the only game in town may be continued quantitative easing. But the ongoing weakness of the euro – fed by such policies – is fueling growth in the eurozone’s current-account surplus.

Indeed, as the euro weakens, the periphery countries’ external accounts have swung from deficit to balance and, increasingly, to surplus. Germany and the eurozone core were already running large surpluses; in the absence of policies to boost domestic demand, those surpluses have simply risen further. Thus, the ECB’s monetary policy will take on an increasingly beggar-thy-neighbor cast, leading to trade and currency tensions with the United States and other trade partners.

To avoid this outcome, Germany needs to adopt policies – fiscal stimulus, higher spending on infrastructure and public investment, and more rapid wage growth – that would boost domestic spending and reduce the country’s external surplus. Unless, and until, Germany moves in this direction, no one should bet the farm on a more robust and sustained eurozone recovery.

Alexis Tspiras is playing an escalating game of brinkmanship, trying to force Europe to give ground or risk a chain-reaction that could cripple the EU

By Ambrose Evans-Pritchard

9:32PM BST 01 Apr 2015

Alexis Tsipras has told his inner circle that if pushed to the wall by the EMU creditor powers, he would tell them 'to do their worst'Photo: AFP

Two months of EU bluster and reproof have failed to cow Greece. It is becoming clear that Europe’s creditor powers have misjudged the nature of the Greek crisis and can no longer avoid facing the Morton’s Fork in front of them.

Any deal that goes far enough to assuage Greece’s justly-aggrieved people must automatically blow apart the austerity settlement already fraying in the rest of southern Europe. The necessary concessions would embolden populist defiance in Spain, Portugal and Italy, and bring German euroscepticism to the boil.

Emotional consent for monetary union is ebbing dangerously in Bavaria and most of eastern Germany, even if formulaic surveys do not fully catch the strength of the undercurrents. This week's resignation of Bavarian MP Peter Gauweiler over Greece’s bail-out extension can, of course, be over-played. He has long been a foe of EMU. But his protest is unquestionably a warning shot for Angela Merkel's political family.

Mr Gauweiler was made vice-chairman of Bavaria's Social Christians (CSU) in 2013 for the express purpose of shoring up the party's eurosceptic wing and heading off threats from the anti-euro Alternative fur Deutschland (AfD). Yet if the EMU powers persist mechanically with their stale demands - even reverting to terms that the previous pro-EMU government in Athens rejected in December - they risk setting off a political chain-reaction that can only eviscerate the EU Project as a motivating ideology in Europe. Jean-Claude Juncker, the European Commission’s chief, understands the risk perfectly, warning anybody who will listen that Grexit would lead to an “irreparable loss of global prestige for the whole EU” and crystallize Europe’s final fall from grace. When Warren Buffett suggests that Europe might emerge stronger after a salutary purge of its weak link in Greece, he confirms his own rule that you should never dabble in matters beyond your ken. Alexis Tsipras leads the first radical-Leftist government elected in Europe since the Second World War. His Syriza movement is, in a sense, totemic for the European Left, even if sympathisers despair over its chaotic twists and turns. As such, it is a litmus test of whether progressives can pursue anything resembling an autonomous economic policy within EMU. There are faint echoes of what happened to the elected government of Jacobo Arbenz in Guatemala, a litmus test for the Latin American Left in its day. His experiment in land reform was famously snuffed out by a CIA coup in 1954, with lasting consequences. It was the moment of epiphany for Che Guevara (below), then working as a volunteer doctor in the country.

A generation of students from Cuba to Argentina drew the conclusion that the US would never let the democratic Left hold power, and therefore that power must be seized by revolutionary force. We live in gentler times today, yet any decision to eject Greece and its Syriza rebels from the euro by cutting off liquidity to the Greek banking system would amount to the same thing, since the EU authorities do not have a credible justification or a treaty basis for acting in such a way. Rebuking Syriza for lack of “reform” sticks in the craw, given the way the EU-IMF Troika winked at privatisation deals that violated the EU’s own competition rules, and chiefly enriched a politically-connected elite. Forced Grexit would entrench a pervasive suspicion that EU bodies are ultimately agents of creditor enforcement. It would expose the Project’s post-war creed of solidarity as so much humbug. Willem Buiter, Citigroup’s chief economist, warns that Greece faces an “economic show of horrors” if it returns to the drachma, but it will not be a pleasant affair for Europe either. “Monetary union is meant to be unbreakable and irrevocable. If it is broken, and if it is revoked, the question will arise over which country is next,” he said. “People have tried to make Greece into a uniquely eccentric member of the eurozone, accusing them of not doing this or not doing that, but a number of countries share the same weaknesses. You think the Greek economy is far too closed? Welcome to Portugal. You think there is little social capital in Greece, and no trust between the government and citizens? Welcome to southern Europe,” he said. Greece could not plausibly remain in Nato if ejected from EMU in acrimonious circumstances. It would drift into the Russian orbit, where Hungary’s Viktor Orban already lies. The southeastern flank of Europe’s security system would fall apart. Rightly or wrongly, Mr Tsipras calculates that the EU powers cannot allow any of this to happen, and therefore that their bluff can be called. “We are seeking an honest compromise, but don't expect an unconditional agreement from us," he told the Greek parliament this week. If it were not for the fact that a sovereign default on €330bn of debts – bail-out loans and Target2 liabilities within the ECB system – would hurt taxpayers in fellow Club Med states that are also in distress, most Syriza deputies would almost relish the chance to detonate this neutron bomb. Mr Tsipras is now playing the Russian card with an icy ruthlessness, more or less threatening to veto fresh EU measures against the Kremlin as the old set expires. “We disagree with sanctions. The new European security architecture must include Russia,” he told the TASS news agency. He offered to turn Greece into a strategic bridge, linking the two Orthodox nations. “Russian-Greek relations have very deep roots in history,” he said, hitting all the right notes before his trip to Moscow next week. The Kremlin has its own troubles as Russian companies struggle to meet redemptions on $630bn of dollar debt, forcing them to seek help from state’s reserve funds. Russia’s foreign reserves are still $360bn – down from $498bn a year ago – but the disposable sum is far less given a raft of implicit commitments. Even so, President Vladimir Putin must be sorely tempted to take a strategic punt on Greece, given the prize at hand. Panagiotis Lafazanis, Greece’s energy minister and head of Syriza’s Left Platform, was in Moscow this week meeting Gazprom officials. He voiced a “keen interest” in the Kremlin’s new pipeline plan though Turkey, known as "Turkish Stream". Operating in parallel, Greece’s deputy premier, Yannis Drakasakis, vowed to throw open the Port of Piraeus to China’s shipping group Cosco, giving it priority in a joint-venture with the Greek state’s remaining 67pc stake in the ports. On cue, China has bought €100m of Greek T-bills, helping to plug a funding shortfall as the ECB orders Greek banks to step back. One might righteously protest at what amounts to open blackmail by Mr Tsipras, deeming such conduct to be a primary violation of EU club rules. Yet this is to ignore what has been done to Greece over the past four years, and why the Greek people are so angry. Leaked IMF minutes from 2010 confirm what Syriza has always argued: the country was already bankrupt and needed debt relief rather than new loans. This was overruled in order to save the euro and to save Europe’s banking system at a time when EMU had no defences against contagion.

Finance minister Yanis Varoufakis rightly calls it “a cynical transfer of private losses from the banks’ books onto the shoulders of Greece’s most vulnerable citizens”. A small fraction of the €240bn of loans remained in the Greek economy. Some 90pc was rotated back to banks and financial creditors. The damage was compounded by austerity overkill. The economy contracted so violently that the debt-ratio rocketed instead of coming down, defeating the purpose. India’s member on the IMF board warned that such policies could not work without offsetting monetary stimulus. "Even if, arguably, the programme is successfully implemented, it could trigger a deflationary spiral of falling prices, falling employment and falling fiscal revenues that could eventually undermine the programme itself.” He was right in every detail. Marc Chandler, from Brown Brothers Harriman, says the liabilities incurred – pushing Greece’s debt to 180pc of GDP - almost fit the definition of “odious debt” under international law. “The Greek people have not been bailed out. The economy has contracted by a quarter. With deflation, nominal growth has collapsed and continues to contract,” he said. The Greeks know this. They have been living it for five years, victims of the worst slump endured by any industrial state in 80 years, and worse than European states in the Great Depression. The EMU creditors have yet to acknowledge in any way that Greece was sacrificed to save monetary union in the white heat of the crisis, and therefore that it merits a special duty of care. Once you start to see events through Greek eyes – rather than through the eyes of the north European media and the Brussels press corps - the drama takes on a different character. It is this clash of two entirely different and conflicting narratives that makes the crisis so intractable. Mr Tsipras told his own inner circle privately before his election in January that if pushed to the wall by the EMU creditor powers, he would tell them “to do their worst”, bringing the whole temple crashing down on their heads. Everything he has done since suggests that he may just mean it.

BUY land, advised Mark Twain; they’re not making it any more. In fact, land is not really scarce: the entire population of America could fit into Texas with more than an acre for each household to enjoy. What drives prices skyward is a collision between rampant demand and limited supply in the great metropolises like London, Mumbai and New York. In the past ten years real prices in Hong Kong have risen by 150%. Residential property in Mayfair, in central London, can go for as much as £55,000 ($82,000) per square metre. A square mile of Manhattan residential property costs $16.5 billion.Even in these great cities the scarcity is artificial. Regulatory limits on the height and density of buildings constrain supply and inflate prices. A recent analysis by academics at the London School of Economics estimates that land-use regulations in the West End of London inflate the price of office space by about 800%; in Milan and Paris the rules push up prices by around 300%. Most of the enormous value captured by landowners exists because it is well-nigh impossible to build new offices to compete those profits away.The costs of this misfiring property market are huge, mainly because of their effects on individuals. High housing prices force workers towards cheaper but less productive places. According to one study, employment in the Bay Area around San Francisco would be about five times larger than it is but for tight limits on construction. Tot up these costs in lost earnings and unrealised human potential, and the figures become dizzying. Lifting all the barriers to urban growth in America could raise the country’s GDP by between 6.5% and 13.5%, or by about $1 trillion-2 trillion. It is difficult to think of many other policies that would yield anything like that.

Metro stops

Two long-run trends have led to this fractured market. One is the revival of the city as the central cog in the global economic machine. In the 20th century, tumbling transport costs weakened the gravitational pull of the city; in the 21st, the digital revolution has restored it. Knowledge-intensive industries such as technology and finance thrive on the clustering of workers who share ideas and expertise. The economies and populations of metropolises like London, New York and San Francisco have rebounded as a result.What those cities have not regained is their historical ability to stretch in order to accommodate all those who want to come. There is a good reason for that: unconstrained urban growth in the late 19th century fostered crime and disease. Hence the second trend, the proliferation of green belts and rules on zoning. Over the course of the past century land-use rules have piled up so plentifully that getting planning permission is harder than hailing a cab on a wet afternoon. London has strict rules preventing new structures blocking certain views of St Paul’s Cathedral. Google’s plans to build housing on its Mountain View campus in Silicon Valley are being resisted on the ground that residents might keep pets, which could harm the local owl population. Nimbyish residents of low-density districts can exploit planning rules on everything from light levels to parking spaces to block plans for construction.

A good thing, too, say many. The roads and rails criss-crossing big cities already creak under the pressure of growing populations. Dampening property prices hurts one of the few routes to wealth-accumulation still available to the middle classes. A cautious approach to development is the surest way to preserve public spaces and a city’s heritage: give economists their way, and they would quickly pave over Central Park.However well these arguments go down in local planning meetings, they wilt on closer scrutiny. Home ownership is not especially egalitarian. Many households are priced out of more vibrant places. It is no coincidence that the home-ownership rate in the metropolitan area of downtrodden Detroit, at 71%, is well above the 55% in booming San Francisco. You do not need to build a forest of skyscrapers for a lot more people to make their home in big cities. San Francisco could squeeze in twice as many and remain half as dense as Manhattan.

Property wrongs

Zoning codes were conceived as a way to balance the social good of a growing, productive city and the private costs that growth sometimes imposes. But land-use rules have evolved into something more pernicious: a mechanism through which landowners are handed both unwarranted windfalls and the means to prevent others from exercising control over their property. Even small steps to restore a healthier balance between private and public good would yield handsome returns. Policymakers should focus on two things.First, they should ensure that city-planning decisions are made from the top down. When decisions are taken at local level, land-use rules tend to be stricter. Individual districts receive fewer of the benefits of a larger metropolitan population (jobs and taxes) than their costs (blocked views and congested streets). Moving housing-supply decisions to city level should mean that due weight is put on the benefits of growth. Any restrictions on building won by one district should be offset by increases elsewhere, so the city as a whole keeps to its development budget.Second, governments should impose higher taxes on the value of land. In most rich countries, land-value taxes account for a small share of total revenues. Land taxes are efficient. They are difficult to dodge; you cannot stuff land into a bank-vault in Luxembourg. Whereas a high tax on property can discourage investment, a high tax on land creates an incentive to develop unused sites. Land-value taxes can also help cater for newcomers. New infrastructure raises the value of nearby land, automatically feeding through into revenues—which helps to pay for the improvements.Neither better zoning nor land taxes are easy to impose. There are logistical hurdles, such as assessing the value of land with the property stripped out. The politics is harder still. But politically tricky problems are ten-a-penny. Few offer the people who solve them a trillion-dollar reward.

Gold In Fed Vault Drops Under 6,000 Tons For The First Time, After 10th Consecutive Month Of Redemptions

by Tyler Durden

03/31/2015 15:30 -0400

Two months ago, when looking at the most recent physical gold withdrawal numbers reported by the Fed, we observed something peculiar: between the publicly reported surprise redemption by the Netherlands (122 tons) and the just as surprise redemption by the Bundesbank (85 tons), at least 207 tons of gold should have vacated the NY Fed's gold vault.

Instead, the Fed reported that in all of 2014 "only" 177 tons of gold were shipped out of the massive gold vault located 90 feet below 33 Liberty Street. Somehow the delta between what we "shipped" and what was "received" in the past year was a whopping 30 tons, or about 15% of the total - a gap that is big enough to make even China's outright fraudulent trade numbers seems sterling by comparison.

This prompted us to ask:

"what happened? Did an intern input the Fed's gold redemptions figures for December, supposedly a different intern than the one who works at the IMF and who caused a stir earlier this week when the IMF, allegedly erroneously, reported that the Dutch - after secretly repatriating 122 tons of gold - had also bought 10 tons of gold in the open market for the first time in nearly a decade.Or perhaps some "other" bank, central or commercial, decided to offset the redemptions by the Netherlands and Germany, and inexplicably added 30 tons of gold in December? The question then becomes: "who" deposited said gold, especially when one considers that even the adjoining JPM vault which is allegedly connected to the NY Fed by a tunnel, only contains some 740K ounces of gold, or about 23 tonnes.Or is it simply that when it comes to accurately reporting the flows of physical gold, classical math is incapable of keeping track of the New Normal gold moves, and the Fed has decided that even when dealing with physical gold there is a "settlement" period?

We still don't know the answer, and while the Fed has not revised its vault gold data, one thing is clear: the slow, stealthy and steady withdrawal of gold from the NY Fed continues. According to the most recent earmarked gold data reported by the Fed, in the month of February another 10 tons of gold departed the NY Fed, following 20 tons in the month before - the tenth consecutive month of redemptions - which if one assumes is merely the delayed relocation of gold previously demanded for delivery, has crossed the Atlantic and is now to be found in Frankfurt..

This means that after 177 tons of gold were withdrawn in 2014 - the largest year of gold redemptions since 2008 when 230 tons of gold departed the NY Fed vault - another 30 tons of parked gold has been recalled to their native lands so far in 2015.

This also means that for the first time in the 21st century the total gold tonnage held at the NY Fed is now under 6000 tons, or 5,989.5 to be precise.

But most importantly it means that all of the 207 tons in Dutch and German withdrawals are now accounted for with a matched and offsetting "departure" at the Fed. Which is why the next monthly update of the Fed's earmarked gold will be especially interesting: if March data shows that the withdrawals continue, it will mean that either Germany, or some other sovereign, has continued to redeem their gold which for some reason they no longer trust is safe lying nearly 100 feet below street level on the Manhattan bedrock.

The question on everybody’s mind for 2015 is when will the stock market start to correct in value and will it turn into a 50+% collapse?

Over the last 15 years investors has been through a lot in terms of market volatility. From the 2000 tech bubble bear market and the 2008 financial crisis bear market investors are far from having their investment psyche scars healing and is for good reason. Many sustained 50+% loss in their portfolio value more than once and are not willing to do it for a third time.

A large group of investors exited the stock market and has never returned. Unfortunately those who exited have missed the seven-year bull market rally to all-time highs. Those who remain in the market are in constant fear that a new bear market will emerge.

The stock market has a tendency to move in a 6 to 8 years cycle. With the current bull market now lasting seven years and was several indicators signaling weakness within the equities market it makes logic sense that a bear market is about to emerge.

The stock market cycle and technical indicators are not the only causes the trigger a bear market. A rising Fed funds rate can cause weakness in the equities market and if you know what to look for you can escape the next bear market and profit from falling prices.

Question: if you could put your money in a guaranteed investment not to lose any principle and receive a 1% per annum return on investment or receive potentially 7% per year but with no guarantee on your principle, which would you choose?

Most people would choose the 7% return option because they understand financial rewards almost always require some risk. Over the last 90 years the stock market has on average returned 7% annualized gains.

Obviously not all years will have a positive gain, but when averaged over many years, it is reasonable to expect an annual return of 7% from the stock market.

What if I told you there is a way to improve on this? For example, if you simply moved your equity investments to a large cash position at the start of each bear market?

The chart below showing the gain from your would have has from 1995 to 2015 by selling all stock holdings when the US stock market topped during 2000 and 2007 avoiding the last two bear markets.

100% cash position during bear markets would have generated 635% ROI, which is a 31% average annual return. The numbers are staggering to say the least. But obviously you cannot pick the exact top and bottom, but even if your timing was way off and you only pocketed half of those gains you would still be way ahead of game.

I believe for investors this is not that difficult because a major trend change takes time and because the moves are so large you don’t need to be perfect with your timing.

Take a look at my analysis charts below. The first one shows the 10 year treasury price which is broken its short term resistance levels and is rocketing higher. We have seen this happen 6-12 months before the last two bear markets started.

Let’s take a look at the Fed rates

Not every rate rise turned into a recession, but nearly everyone has. Rising rates will lead to a market downturn.

Could the next bear market/recession occur when rates start to climb? After analyzing economic data provided by Brad Matheny I have a max rate at 2% over the next couple years.

That combination of technical indicators, analysis above couple with the rising fed rate hikes had created the perfect storm for a bear market to emerge which I expect to last 1-2 years.

Bottom line, we are still in a bull market but only months away from a bear market. Do not ignore these warning signals.

Keep your eye on the 2 year treasury rates instead because they usually lead Fed funds, and will provide an earlier warning signal as to the markets down turn.

When rates start to rise, we may only be weeks, instead of months, before the stock market starts to collapse.

Americans Not In The Labor Force Soar To Record 93.2 Million As Participation Rate Drops To February 1978 Levels

by Tyler Durden

04/03/2015 12:32 -0400

So much for yet another "above consensus" recovery, and what's worse it is, well, about to get even worse, because while the Fed keeps baning some illusory drum that slack in the economy is almost non-existent, the reality is that in March the number of people who dropped out of the labor force rose by yet another 277K, up 2.1 million in the past year, and has reached a record 93.175 million.

Indicatively, this means that the labor force participation rate dropped once more, from 62.8% to 62.7%, a level seen back in February 1978, even as the BLS reported that the entire labor force actually declined for the second consecutive month, down almost 100K in March to 156,906.

Why is this important? Because as long as the true employment rate, that of the civilian employment to total population, remains at depression levels, there will be no incrases in average hourly earnings.

Blackmail. Extortion. Intimidation. This isn’t the behavior of a trusted friend. It’s the behavior of an arrogant sociopath.And the rest of the world is sick of it.Other countries—even allied nations—see that times are changing. There are new players on the rise, and the US isn’t the only option anymore.Increasingly they’re turning to China, who, by some metrics, is already the largest economy in the world.And the US government can’t do anything about it.This is happening now with increasing speed. It’s mainstream news everywhere: the US is being shunned by its allies for the new kid on the block.This has major implications for the United States. History shows that when reserve currencies change, the losing country almost invariably goes through significant turmoil.But here’s the thing—the world is changing. But it’s not coming to an end.Yes, things will change dramatically in the West in the coming years.The standard of living that was attainable in the US because of its economic dominance will diminish.For cues, look to Europe to see how unsustainable policies unravel when you don’t have the backing of the world’s reserve currency.But people who recognize and embrace these changes early will prosper, for there will be tremendous opportunities throughout this process.

Argentina, once a regional energy leader, is now better known for financial busts and bombastic politicians than hydrocarbons prospects. Still, with a resource potential both vast and untapped, the nation has never been far from energy investors' minds. The question today is just how much Argentina is willing to change and how this plays into a low oil price environment that is already negatively impacting investment elsewhere.

Argentina's deliberate efforts to appease some of its international creditors, combined with an overhaul of the nation's hydrocarbons framework have the potential to lure foreign investors back. The promise of a change of government - and potentially a more market-friendly approach - later this year should add to the country's appeal.Experts have kept a watchful eye on Argentina ever since the US Energy Information Administration identified the nation as holding the world's second largest shale gas and fourth largest shale oil reserves. This translates to an estimated 802 trillion cubic feet of technically recoverable shale gas and 27 billion barrels of oil.Yet unlike the production boom unleashed by the shale revolution in the United States, Argentina's vast shale plays have remained comparatively idle.Politics and economics are largely to blame.Investor confidence in Argentina has been damaged by heavy-handed nationalist politics, including the nationalization of oil company YPF in 2012. Price caps and export restrictions have added to what many view as a trying business environment.Exploration and production in Argentina is also expensive. It costs an estimated $11 million per well in Argentina, a figure YPF hopes to bring more into line with international standards of $7 million by the end of the year. Whether this target is feasible remains to be seen.But in the nation famous for the Albicelestes, things are starting to change. Argentina is making efforts to improve relations with international creditors and agreed to a $5 billion settlement with Spanish company Repsol as compensation for its YPF stake.Meanwhile, exploration and production in the unconventional fields is slowly picking up. Argentina is one of just four countries to produce commercial quantities of shale oil or gas - joining the US, Canada, and China - and is the only producer in Latin America. Most of this production has come from the Vaca Muerta formation in west-central Argentina.Argentina's shale fields are currently producing 41,000 barrels of oil equivalent per day from 320 wells. These are important milestones for the nation's oil and gas industry and YPF expects both figures to increase in 2015.Foreign investors are also trickling back to Argentina. Chevron was the first oil major to take the plunge with a deal worth a potential $15 billion. YPF has also received commitments from DOW Chemical for a potential $188 million and Petronas for a potential $9 billion, both in Vaca Muerta. YPF has also signed preliminary deals with Wintershall and Sinopec.The Argentine government hopes the overhaul of the national hydrocarbons law will further spur investor activity. Many of the benefits included in Chevron's deal have been carried over, including the ability to export up to 20% of production free of tariffs or sold domestically at international prices. The legislation also caps royalties for oil-producing provinces at 12% and centralizes the bidding process.Replicating the United States' success was always going to be a tall order. The unique set of factors, including easy access to financial and human capital, technology, know-how and a favorable regulatory and business environment - are not easily reproduced in Argentina or elsewhere.Argentina is instead seeking to adapt US technology and innovation to increase efficiency and productivity in existing and new wells, with a focus on large-scale drilling and cost reduction.As for the low price environment, Argentina's subsidized domestic market will shield producers in the short term. Oil prices are set at $77.50 per barrel and natural gas as $7.5 per million British thermal units (MMBtu). Of course, this provides no such protection for exporters.A new administration will need to address the issues of subsidies as well as boost local production in order to reduce the energy trade deficit that is costing Argentina's government an estimated $6 - 8 billion per year.In the meantime, excitement around Argentina's energy prospects is welcome and while investors are wise to remain cautious, there are positive signs that the nation's energy ambitions are within reach.

Volatility will be high “possibly until earnings can catch back up with valuations,” writes Schwab’s Sonders.

By Liz Ann Sonders

March 31, 2015 3:54 p.m. ET

Here are my key points:

• Stocks have gone 28 trading days without back-to-back gains; a very unique experience historically.

• Uncertainty abounds, associated with Federal Reserve policy, economic surprises on the weak side, and earnings which have dropped into negative territory.

• Investor sentiment is swinging more wildly than is normally the case.

One of our theses for 2015 has been heightened volatility, and with the kind of up-and-down action we’re seeing in the stock market, that view has been accurate to-date. Two weeks ago the S&P 500 was near an all-time high, and then last week lost about 2.5%. In fact, all of the major U.S. equity indexes were down more than 2% last week.

And as I write this today, the market is up over 1%. With only two trading days (including today) left in the first quarter, the S&P 500 is about flat for the quarter. This type of market action can cause a lot of angst, especially among individual investors.

Bespoke Investment Group (BIG) is among the best in the business at analyzing short-term market movements for any longer-term implications. They show that the S&P 500 has seen nine swings of 3.5% or more—with the largest being the 7% run from early-to-late February. For some of the smaller, less broad-based indexes, the swings have been even greater.

Twitter was alive last week around the fact that the S&P 500 has gone a very long stretch without being able to put together back-to-back gains. As of Friday, that streak is now 28 trading days. A streak that long is so rare, it’s only happened twice before since World War II—in May 1970 and April 1994.

To get an idea of how these streaks impacted returns historically BIG looked at a slightly larger sample set, by including streaks of at least 25 trading days. On average, long streaks without back-to-back gains were actually positive for returns looking forward a month.

Be very careful about trying to pinpoint a single thing on a daily basis. It’s human nature—and the media’s obsession—to try to find a particular reason for the market’s action on any given day; but more often than not, it’s simply the imbalance between supply and demand (i.e., “more buyers than sellers” or “more sellers than buyers”) that defines short-term market movements.

More broadly though, it is perhaps uncertainty around Fed policy and the recent weakness in U.S. economic data that has contributed to the pick-up in market volatility. Fed Chair Janet Yellen probably hasn’t helped ease uncertainty by noting on Friday that the Fed is data dependent and the pace of interest rate hikes could “speed up, slow down, pause, or reverse.”

The Citigroup Economic Surprise Index (CESI) for the United States has plunged over the past couple of months—the Ned Davis Research (NDR) version of the index below is smoothed over rolling eight-day periods. The index does not measure economic growth in an absolute sense; instead it measures whether economic data is coming in better (above zero) or worse (below zero) than expected.

The stock market has historically had its worst performance when the U.S. CESI is in its worst zone; as has been the case recently.

The culprits behind the weakness have been dominated by the harsh winter weather in parts of the country; as well as the West Coast port disruptions. Once again last week, weaker-than-expected reports outnumbered stronger-than-expected reports, which has been the trend for a couple of months. The most headline-grabbing miss last week was the revision to fourth quarter (2014) real gross domestic product (GDP), which was unrevised at 2.2%; below the 2.4% consensus expectation.

At the latest CESI low, it was 1.7 standard deviations below the historic mean, according to NDR. Importantly though, the index is mean-reverting and showing signs of reversing from its latest slump, which is good news for the economy…and possibly for stocks.

As the CESI has recovered historically, stock market performance picks up meaningfully. Caveat: These are averages and not indicative of the likely path this time (think “past performance is not guarantee of future results”).

Two of the more timely and leading economic indicators—both of which saw better readings upon their most recent releases—are Markit’s composite purchasing managers index (PMI) and initial unemployment claims. Some next-level leading indicators have been signaling a turn for the better as well; including mortgage applications for home purchases, railcar loadings, and hotel revenues. Further supports include existing home prices, bank lending, and consumer net worth.

The problem in the shorter-term though—at least for the stock market—is that economic weakness, the stronger dollar, and the plunge in oil prices have all contributed to a drop in earnings growth. This has been a topic I’ve been covering over various mediums recently.

In the just-released broad fourth quarter 2014 corporate profits report (which comes out in conjunction with GDP), foreign profits of U.S. companies fell a sharp 5.3%—the largest quarter-over-quarter decline since 2008. That puts foreign profits only 5% above their 2008 peak. On the other hand, although domestic profits of U.S. companies edged up only 0.3% quarter-over-quarter, domestic profits reached another record high and are 22% above their 2006 peak.

The two main culprits behind the earnings weakness have been the plunge in oil prices (energy sector) and the strength in the dollar (multi-national companies).

Honing in on the S&P 500 specifically, operating earnings have moved into negative territory on a quarter-over-quarter basis; and are expected to remain negative for the next two quarters. According to BCA Research, since the 1970s, there were three non-recessionary periods when profit growth slipped into negative territory: 1986, 1998 and 2012. In 1986, stocks pulled back by more than 10% (and subsequently experienced the Crash of 1987); stocks fell by about 20% in 1998; and stocks dropped by 10% and then 8% in a short span of time.

The swings in economic data, which have contributed to the swings in the stock market, have all contributed to the swings in investor sentiment. As I’ve noted in recent commentary—as well as on Twitter—bearishness had come back fairly quickly recently, which had been surprising given the market trading near all-time highs two weeks ago. But that has changed, as bullish sentiment on the part of individual investors saw its biggest weekly increase of this year. The dominant measure for individual investor sentiment comes from the American Association of Individual Investors (AAII) and you can see the latest gyrations below.

The good news is the rebound in bullishness has not taken it above the 2009-2015 bull market average of 38.8%. But it does highlight the skittishness of investor sentiment given the current state of Fed/economic/earnings affairs.

We reaffirm our view that although the secular bull market that began in 2009 is not over; it’s likely to be a much choppier ride for investors…possibly until earnings can catch back up to valuations.

Sonders is chief investment strategist with Charles Schwab.

March Payrolls Huge Miss: Only 126,000 Jobs Added, Worst Since December 2013

by Tyler Durden

04/03/2015 08:36 -0400

We warned yesterday that the "whisper expectation is for a NFP print that will be well below consensus, somewhere in the mid-100,000s if not worse now that the bartender hiring spree is over", and we were right: moments ago the BLS reported that in March a paltry 126K jobs were added, nearly 50% below the 245K expected, and the lowest monthly increase since March 2013.The unemployment rate was unchangned at 5.5%. The change in total nonfarm payroll employment for January was revised from +239,000 to +201,000, and the change for February was revised from +295,000 to +264,000. With these revisions, employment gains in January and February combined were 69,000 less than previously reported. Over the past 3 months, job gains have averaged 197,000 per month.Most importantly this ends any speculation about a rate hike in mid 2015, or ever for that matter, as virtually all Fed credibility is now lost.

Total nonfarm payroll employment increased in March (+126,000). Over the prior 12 months, employment growth had averaged 269,000 per month. In March, employment continued to trend up in professional and business services, health care, and retail trade, while employment in mining declined. (See table B-1.)Employment in professional and business services trended up in March (+40,000). Job growth in the first quarter of 2015 averaged 34,000 per month in this industry, below the average monthly gain of 59,000 in 2014. Within professional and business services, employment continued to trend up in architectural and engineering services (+4,000), computer systems design and related services (+4,000), and management and technical consulting services (+4,000).Health care continued to add jobs in March (+22,000). Over the year, health care has added 363,000 jobs. In March, job gains occurred in ambulatory health care services (+19,000) and hospitals (+8,000), while nursing care facilities lost jobs (-6,000).In March, employment in retail trade continued to trend up (+26,000), in line with its prior 12-month average gain. Within retail trade, general merchandise stores added 11,000 jobs in March.Employment in mining declined by 11,000 in March. The industry has lost 30,000 jobs thus far in 2015, after adding 41,000 jobs in 2014. The employment declines in the first quarter of 2015, as well as the gains in 2014, were concentrated in support activities for mining, which includes support for oil and gas extraction.Employment in food services and drinking places changed little in March (+9,000), following a large increase in the prior month (+66,000). Job growth in the first quarter of 2015 averaged 33,000 per month, the same as the average monthly gain in 2014.Employment in other major industries, including construction, manufacturing, wholesale trade, transportation and warehousing, information, financial activities, and government, showed little change over the month.In March, the average workweek for all employees on private nonfarm payrolls declined by 0.1 hour to 34.5 hours. The manufacturing workweek decreased by 0.1 hour to 40.9 hours, and factory overtime remained at 3.4 hours. The average workweek for production and nonsupervisory employees on private nonfarm payrolls decreased by 0.1 hour to 33.7 hours. (See tables B-2 and B-7.)In March, average hourly earnings for all employees on private nonfarm payrolls rose by 7 cents to $24.86. Over the year, average hourly earnings have risen by 2.1 percent. Average hourly earnings of private-sector production and nonsupervisory employees rose by 4 cents to $20.86 in March. (See tables B-3 and B-8.)

If you know the other and know yourself, you need not fear the result of a hundred battles.

Sun Tzu

We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.